Where the Single-Family Rental Market Is Heading: Capital Economics

No doubt, the potential of the REO to rental market has caught the attention of both individual and institutional investors. But, what is the potential of the REO to rental market, and how long will it continue? In a recent report authored by economist Paul Diggle, ""Capital Economics"":http://www.capitaleconomics.com/ addressed those questions.

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So far, Capital Economics said those who seized the opportunity early on appear to have achieved gross rental yields between 8 percent and 12 percent, a sufficient amount to cover the price tag of managing single-family rentals.

The sufficient rental yields, however, will only last as long as there are enough discounted properties to purchase.

Recently, the ""National Association of Realtors reported"":http://www.dsnews.com/articles/august-pending-home-sales-in-surprise-drop-2012-09-27 pending home sales slipped month-over-month in August, noting shortages of lower priced inventory in much of the country, especially in the West.

While recent housing data points to a decrease in the supply of distressed inventory, Capital Economics said, ""the potential supply of distressed homes is considerable,"" noting an estimated 3.8 million homeowners who are either deeply delinquent or already in foreclosure.

In addition, there are about 375,000 REOs, but ""the actual supply on the market has been dropping rapidly, particularly in the cities being targeted by investors,"" Diggle wrote.

Prices are also rising.

""RealtyTrac recently reported"":"":http://www.dsnews.com/articles/foreclosure-related-sales-see-biggest-price-increase-since-2006-realtytrac-2012-08-30 a 6 percent quarterly increase in the average price of foreclosure-related sales.

In Phoenix, where prices fell drastically and are now rapidly rising, Capital Economics said the three-month annualized increase in prices is currently at 25 percent, a rate that will lead to the market becoming overvalued in a little over a year.

Thus, with distressed inventory shrinking and prices rising, the research firm said, ""Investors will not continue acquiring single-family homes beyond a few more years.""

Once interest in the REO to rental market wanes, the focus will be on two exit strategies Ã¢â‚¬" selling the property or spinning off the rental portfolio to a property manager, Capital Economics explained.

The research firm concluded the report by stating, ""The bottom line is that small-scale, Ã¢â‚¬ËœMom and PopÃ¢â‚¬â„¢ investors will continue to provide the bulk of the homes to the single-family rental market. Nevertheless, depending on how efficiently institutional investors can acquire single-family homes over the next few years, there is scope for them to make a significant contribution to the housing recovery.""